Technical Analysis and the Stock Market

By Stock Research Pro • March 29th, 2011

Technical analysis for stock market investors involves the use of stock price patterns and trading volume to forecast future price values and patterns. Unlike fundamental analysis, technical analysts are not concerned with financial statements, management teams, or industry forecasts. Instead, technical analysis is focused on investor behavior and the clues that past price patterns can provide regarding future stock valuations. Done right, technical analysis enables investors to exploit repeated price patterns for profit.



Tools and Methods for Conducting Technical Analysis


Technical analysts seek to identify past price trends and use that information to predict future stock price movements. The methods below are among those that help make these price predictions:

  • Stock charts- Stock charts are one of the primary tools used in technical analysis to view a series of stock prices (and often the associated trade volume) over a specified period of time. Line charts, bar charts, and candlestick charts are the three main types of stock charts. Investors will decide to work with whichever they believes provides the best view of the data they deem to be the most relevant.

    • Video: Stock chart basics

  • Moving averages- Moving averages (MA) help technical investors determine the current direction of a stock price with a lag. Moving averages are the mathematical result derived by averaging a specified number of historical data points (e.g. 15 day, 50 day, 200 day, etc.) The results are presented as chart data to provide investors with a smooth and easily read illustration of a price trend. The results are referred to as “moving” averages because as new data points become available, the oldest fall of the chart.

  • Trade volume- The stock trading volume is relevant information for a technical investor to analyze as it helps to confirm suspected price trends. Both upward and downward price movements are determined to be more significant when accompanied by larger trade volumes. On the other hand, price moves that are accompanies by weak trade volume are often seen as suspect.


    • Who Uses Technical Analysis?


    Short-term investors, such as day traders, are more apt to use a technical analysis approach than longer-term investors. The general belief among most professional traders is that, over the long-term, the strength of a company and its industry will support a stock price. That said, savvy technical investors can enjoy some nice profits in exploiting short-term price moves through technical analysis.

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    The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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